Financial budgeting is the process of allocating resources based on projected sales, headcount, capital and operating expenses, in order to achieve financial objectives.
Static budgets rely on set periods, a fiscal year for example, and create a fixed forecast for that period. Rolling forecasts, as an extension to financial budgeting, support periodic updating of budget assumptions, and extend the time period out beyond the end of the fiscal year. By continuously forecasting out 4 – 6 quarters, you can avoid the “fiscal year cliff” and give your organization a head start on next year’s budget.
Static Budgets can Limit Growth
The future is uncertain, but rolling forecasts
will keep your business on the road to success.
Today’s market volatility is driving increasing interest and adoption of rolling forecasts. In fact, in a recent Hackett survey, 55% of respondents indicated they were adopting a form of rolling forecasts. Rolling forecasts are extremely beneficial, particularly for large and dynamic enterprises that have to perpetually alter their budgets and plans to adapt to new trends. Rolling forecasts allow for more accurate and versatile forecasting that will remain true to a company, even amid fluctuations in the industry, economy, or marketplace.
Improved Risk Analysis
Dynamic industries face an increased propensity toward risk, due to the fluctuating nature of their markets. With a rolling forecast, businesses can continually adapt future forecasts to reflect industry, economic, and business changes, enabling them to reduce risk and allocate resources more optimally in pursuit of their financial objectives.
For a business to thrive, it needs to be able to readily adapt to changing customer and market trends. For dynamic industries, this is particularly true as the habits of consumers can fluctuate rapidly. With rolling forecasts, businesses can be more opportunistic in their decision-making because they’ll have the ability to tweak their business assumptions, alter budget allocations, and adjust their spending more quickly, enabling them to better respond to industry and consumer demands.
For large, dynamic enterprises, financial forecasting is particularly challenging because it can be difficult to know where the business will be 12 months down the road. Additionally, every business decision entails considerable risk, and weighing the value vs. risk of a decision can be challenging.
One technique that many companies use as part of their rolling forecast process is “driver-based planning“. The idea here, is that instead of budgeting or forecasting every line in your revenue or expense budget, you identify the key “drivers” that impact many other line items and focus on them. By linking other line items to the key “drivers”, planners can focus their forecasting efforts on material factors, such as orders or sales reps, and see the impact that changes to these line items have on the overall budget or forecast.
Dynamic businesses are in a constant battle with time, and there are a lot of urgent business adaptations that they need to make to succeed. With a rolling forecast, businesses can better respond to time-sensitive decisions to ensure the company is perpetually advancing its goals. The forecast is regularly updated at predetermined intervals to ensure that forecasts are always based on the most relevant and timely information.
The greatest difficulty in budgeting is factoring in all businesses variables to create accurate plans for the future. With rolling forecasts, the forecast is updated regularly, so businesses can perpetually adjust the forecast to accommodate any recent changes or trends, creating a plan that is far more realistic and reliable.
Rolling forecasts are indispensable to large enterprises, and they provide the versatile planning abilities that dynamic industries need. Nonetheless, many businesses fail to implement rolling forecasts effectively, resulting in an overly convoluted process that is difficult to maintain.
With cloud-based EPM software, businesses can greatly simplify their rolling forecasts, streamline the budget cycle, and reduce human error. With multi-dimensional forecasting abilities, businesses will have greater control over their budgets while experiencing increased visibility and control over the what-if scenarios that drive business decision making.
To learn more, read our free white paper Best Practices in Rolling Forecasts.